What’s Killing India’s IT Outsourcing Market

Published onApril 22, 2016

by: Karthik Sundaram

The quarterly results are out this week. And uniformly, all the WITCH firms (Wipro, Infosys, TCS, Cognizant, and HCL) are taking a dive (OK, if you count Infosys from the last year, it is probably clambering back, but definitely not a big thing.) Attrition is probably at its highest, even as the slave drivers compete to handcuff employees with 60-90 days quitting notices. Clearly there is a writing on the wall, and the venerable leaders are refusing to remove their noble heads from the sandpits to read that writing. With over a decade and more of experience in dealing with large, medium, and smaller IT firms, I realize there are some key issues facing India’s IT outsourcing market, and here are some:

It was the wrong business from the start: If the entire Indian IT outsourcing industry business model were to be presented to the Sand Hill Road vultures (their story for another day), it would be pooh-poohed for the flawed business assumptions. Sure, those founding five guys at Infosys paint a glorious picture of how they brought IT to India on a dial-up phone, but they really brought in the wrong deal. American firms have been ruthless in decimating their workforce to gain better bargains with Indian IT workforce. How long did it take them to realize they could bargain some more with the same workforce and pay much less, going forward? I know vendors who have had to slash their current onsite consultant prices by over 20% just to retain business. The race to the bottom business model has become the nemesis for India. From ludicrous 25-30% growth in the early 2000s, the WITCH firms are now struggling to prove 2-3% growth every year. Margins, of course, are a different story (if at all).

Lowest barrier to competition: Once IT services evolved from onsite engagement that then directed an offshore delivery, to just a complete offshore business, the market became a free-for-all. This in turn has ravaged the business models, business ethics, and even cross-country laws and regulations. Today, the market is flowing towards economies like East Europe, Philippines, and Latam, where growing number of companies leverage their highly educated workforce to compete with the complacent Indian firms. One CIO I know has built a 300-member team out of Belarus, and his average team experience is a PhD!

Toplines connected to Bottoms of Pyramids: If you look at any recent IT report, over 40% of the industry is composed of infrastructure management services–servers, networking gear, end-user devices and so on. This requires basic skills but large volume of staff. In the early days, when IT was still sexy, droves of fresh engineering graduates couldn’t wait to sign up for a job at these large firms. With dreams of assignments in the US and other countries abroad, the Indian IT market was a prime example of the bottom of the pyramid. And the IT companies’ topline profits were directly connected to expanding that pyramid base. From those heady days, today’s IT big fish are finding it difficult to attract fresh talent. The base is shrinking and so is the topline profits.

The Analysts Fake Up: Over the last two decades, numerous analyst firms made hay while the IT Services boom happened. Today, they are dubiously quiet, or are evangelizing As-a-service or Digital Consumption Services to keep those fees tinkling in. Gartner predicts India to be the third largest consumer of IT services in Asia, while predicting US markets to top out by 2017. Nothing they say is revolutionary. No CIO ever made a smart decision about their IT vendor based on an analyst report. And not to mention, most of these reports, quadrants, waves, and clubs are pay-to-play engagements. With many of the services now fading into oblivion, these agents of intelligence will need to find new services to sell. Also, in most cases, the firms don’t consider any vendor below a $1B size worthy of their pursuit, and IT buyers really have no clue about those vendors.

Gateways and gatekeepers: Just yesterday, I came off a meeting with a small IT services firm, led by a former VP from a larger company. He and his team have build a great practice of offering very business-driven services, even for graveyard jobs like QA and Testing. His biggest challenge? His sales team is not able to break through new customer doors, because all of them have implemented vendor management systems and opened them to a select few services firms. These MSPs guard the doors well, and have sliced down margins to the thinnest–and make vendors compete with each other before selecting one. The CEO’s personal relationships are only so many, and he is very afraid of his dwindling pipeline. In continuation, he has to constantly trim his bench size in India.

Self-service and Automation Rule: This is probably going to be a bigger slayer of India’s IT outsourcing markets if it doesn’t pay attention. By allowing personal devices and authorizing self-service, CIOs are slowly encouraging their business units to take care of their end-user computing. Automation is bringing in more efficiency into customer service, business processes, and cross-enterprise transactions that were traditionally managed by services firms.

The Rise of Entrepreneurship: The last few years have seen a slew of fresh graduates eschew large company roles to begin life on their own. They are ganging up to innovate for problems that are local, regional, or (very gratifyingly), “Indian.” With angel investments and easier funding availability, this sector is on a much faster growth. Initially, some of the larger firms tried to set up incubators and funds, but these became nothing more than PR exercises. The “services” approach has held these firms from truly embracing innovation or entrepreneurs.

Lack of growth pushing early exits: Once considered almost government-like, only with rapid growth, the IT industry has ground to a halt in finding new roles and paths for their people. This is pushing more talent out to newer ventures.

What do you see and observe about this industry? Where are the Indian firms going wrong and why do they not see change writ large on the walls?